Business and management

The Olympus scandal

Coming clean

THE aftershocks of this financial temblor will be felt for years to come. Olympus, a Japanese camera maker plagued by an accounting scandal, finally submitted revised earnings statements today. And the financial hit was even more massive than many had expected: net assets came in ¥105 billion ($1.3 billion) lower and now reach a meagre ¥46 billion; last year's net profit was halved to ¥3.9 billion.

Olympus's release of the new statements was itself an accomplishment. The firm needed to revise five years worth of annual accounts. This required auditors to look as far back as the 1990s, when the investment losses that were at the origin of the accounting scandal were still on the books. The Japanese camera maker also needed to submit its financial statements for the past fiscal quarter. By meeting the deadline of December 14th, Olympus avoided having its shares being automatically delisted from the Tokyo stock exchange.

This should have given the firm's share price a boost. Instead, it fell by as much as 19% before closing 4.1% lower. The steep decline in net assets took a toll, as did the broader uncertainty over whether the shares will indeed remain listed. The Tokyo stock exchange delists a firm if it sees ties to the yakuza, the Japanese mafia. So far there is no evidence of this, but the revised statements mark the beginning of a forensic accounting investigation—not the end.

What is more, the Tokyo stock exchange will delist a company if improper financial reporting has "a material impact". It is hard to see how accounting irregularities to the tune of $1.5 billion over six years do not. But Japanese regulators sometimes interpret such rules in creative ways.

The revised financials not only show the severity of Olympus's troubles, but its need of better management. Michael Woodford, the former boss who was ousted after he demanded answers to suspicious deals, may still come back. He was again in town this week, talking to shareholders and politicians—and trying not to come across as confrontational. Addressing a parliamentary committee today, for instance, he said that he wanted to avoid a proxy fight when the company's board comes together for a special meeting (possibly in February) to discuss a change of management and corporate governance reforms.

More puzzling is the behaviour of Olympus's auditors: KPMG and Ernst & Young, which took over from KPMG in 2009. KPMG "qualified" the new financial statements citing some missing documentation, whereas Ernst & Young signed off on the years it reviewed. If nothing else, this again suggests that financial reporting is no exact science.

I do believe there have been a few changes since Enron. Not enough, but some improvement. Some executives went to prison. The company disappeared for all practical purposes. How about Olympus?

Stockholders in Japanese companies are not especially esteemed. They are outsiders, even if they are Japanese. Ultimately, even if they are companies with cross-shares, although we can bet those companies won't raise much of a fuss about financial shenanigans in companies they own shares in.

The president of Olympus just today announced that despite his previous statements, many of the current board members may stay on next years. Want to invest in this kind of company? Go right ahead. Foreigners might not be appreciated, but their money is as long as no loss of control goes with it.

This Olympus scandal highlights the risks of investing in poorly regulated stock markets. Investing in the Tokyo stock exchange adds a new level of risk to equity investing. A level of risk can be eliminated by sticking with the better regulated U.S. and (most) European

There's probably only a few companies who do everything by the book, and even then, large companies don't have to follow that many rules in the market. If we really revised all the companies financially, we would find so much wrongdoing that everything would crumble down. Right now, not even the Economist reporters are doing their jobs the way they should. They are selling themselves as a somewhat legitimate independent news magazine but just by looking at their articles, you can tell that they are just another puppet owned by lobbies.